Via the
Revenue Act of 1917,
withholding of income tax was limited to non-resident aliens (“NRAs”)
and foreign corporations. This pattern of withholding by applying it
only to
these foreigners manifested itself in §221 in the Revenue Acts of
1918, 1921, 1924 and 1926. Starting with the Revenue Act of 1928, the
format of these tax acts changed to the pattern that was used for the
1939 Code. In these acts, withholding of income tax on NRAs was set
forth in §144 for the 1928 Act, and then §143 for the later
acts.
In this
file, I have strung together PDF images of the various sections
of all the old tax acts that concern wage withholding. I have
also
extracted the relevant provisions of the regulations for some of these
acts and placed them in chronological order with the tax acts in this
same file. But Regs
74, 77, 86, 94, 101 and 103 are not in this file because the PDF
images
for them contain 2 pages for each PDF image page and thus do not need
to be in
this file for "wide" reasons. Extracts of these regulations
concerning wage withholding
are here:
From 1917, withholding clearly applied to profits, dividends, interest,
wages, etc, of NRAs. Withholding from wages does, however, create a
problem as a result of the frequency of withholding. The United States
shares common
borders with Canada and Mexico, and Canadians living in Windsor work in
places like Detroit. Mexican agricultural workers cross the border to
pick fruits off American trees in the Imperial Valley and San Diego
orchards. Withholding on wages from employees that crossed the border
to work in the US created more problems as the filing requirement
amounts dropped, encompassing more foreign employees. In the mid-20s,
we
entered into treaties with Canada and Mexico that governed withholding
on these foreign workers, and these treaties caused changes in the
various tax acts. See §210 of the 1924 act. Generally, those NRAs
who enter and leave the US in frequent intervals have received lower
tax rates because of these treaties. This condition prevailed all the
way thru adoption of the 1939 Code. But, please remember that up thru
1941, withholding of income tax was based entirely on §143, which
dealt with profits, dividends and interest, as well as wages.
The current provisions regarding wage withholding for income tax
purposes are found at § 3401, et seq. The origins of this type of
withholding are two acts: the Victory Tax Act and Current Tax Payment
Act. In Oct., 1942, the Victory Tax was enacted, 56 Stat. 884.
You
may
read
this act very thoroughly searching for words showing how
the act specifically applies, and you will end your search by focusing
on §466:
"SEC. 466. TAX COLLECTED AT SOURCE.
"(a) REQUIREMENT OF WITHHOLDING.-There shall be withheld,
collected,
and paid upon all wages of every person, to the extent that such wages
are includible in gross income, a tax equal to 5 per centum of the
excess of each payment of such wages over the withholding deduction
allowable under this part. This subsection and subsection (c) shall not
be applicable in any case provided for in section 143, except in the
case of wages paid to residents of a contiguous country who enter and
leave the United States at frequent intervals."
Thus for Canadians and Mexicans, wage withholding was no longer
governed by §143, but this section instead. Section 143 still
governed withholding on “items” of income like profits, dividends and
interest.
The Victory Tax Act was in effect for only a short time, being replaced
by the Current Tax Payment Act the following year. See 57 Stat. 127.
This act created a new subchapter for the 1939 Code. You may study this
whole act searching for some provision clearly stating how this act
applies to specific people, and you will only find the following:
"(6) for services performed by a
nonresident alien individual, other
than a resident of a contiguous country who enters and leaves the
United States at frequent intervals, or
"(7) for such services, performed by a nonresident alien
individual who
is a resident of a contiguous country and who enters and leaves the
United States at frequent intervals, as may be designated by
regulations prescribed by the Commissioner with the approval of the
Secretary, or”
This provision related to exclusions from the definition of wages for
that act, and excluded from this exclusion were the above, which was
the only provision stating how this act applied to people. This same
language appeared in §3401 of
the '54 Code.
Today, this scheme manifests itself in the regs. For example, see:
Sec. 31.3401(a)(6)-1 Remuneration for services of nonresident
alien individuals.
(a) In general. All remuneration
paid after December 31, 1966, for
services performed by a nonresident alien individual, if such
remuneration otherwise constitutes wages within the meaning of Sec.
31.3401(a)-1 and if such remuneration is effectively connected with the
conduct of a trade or business within the United States, is subject to
withholding under section 3402 unless excepted from wages under this
section. In regard to wages paid under this section after February 28,
1979, the term “nonresident alien individual'' does not include a
nonresident alien individual treated as a resident under section 6013
(g) or (h).
In this file,
you
will
find
a
text version of the current Part 31 regs.
Please look for the various portions highlighted in red.
In summary and conclusion, withholding on wages has it origins in the
older tax acts that limited withholding to NRAs. With the Victory Tax
Act, wage withholding was limited to those Canadians and Mexicans that
entered and left the US in frequent intervals. The same scheme was
imposed via the Current Tax Payment Act, carried over into the 1954
Code. All other withholding on profits, dividends, interest, wages, et
cet, of foreigners other than Canadians, Mexicans and Puerto Ricans is
governed by §§1441, et seq.
(b) Compensation for personal
services of an individual–
(1) Exemption from withholding. Withholding is not required
under
Sec. 1.1441-1 from salaries, wages, remuneration, or any other
compensation for personal services of a nonresident alien individual if
such compensation is effectively connected with the conduct of a trade
or business within the United States and–
(i) Such compensation is subject to withholding under section 3402
(relating to withholding on wages) and the regulations under that
section;
(ii) Such compensation would be subject to withholding under
section
3402 but for the provisions of section 3401(a) (not including section
3401(a)(6)) and the regulations under that section.